Fair Values of Financial and Nonfinancial Instruments

9 Months Ended

Sep. 30, 2014

Fair Values of Financial and Nonfinancial Instruments

Fair Values of Financial and Nonfinancial Instruments

Note 14. Fair Values of Financial and Nonfinancial Instruments

Financial Instruments

The Company’s financial instruments are held for purposes other than trading. The fair values of these financial instruments are based on quoted market prices, where available, or are estimated using other valuation techniques. Estimated fair values are significantly affected by the assumptions used. As required by ASC No. 820 (“ASC 820”), “Fair Value Measurements and Disclosures,” fair value measurements of financial instruments are categorized as Level 1, Level 2 or Level 3, based on the types of inputs used in estimating fair values.

Level 1 fair values are those determined using quoted prices in active markets for identical assets or liabilities. Level 2 fair values are those determined using directly or indirectly observable inputs in the marketplace that are other than Level 1 inputs. Level 3 fair values are those determined using unobservable inputs, including the use of internal assumptions, estimates or models. Valuations, therefore, are sensitive to the assumptions used for these items. Fair values represent the Company’s best estimates as of the balance sheet date and are based on existing conditions and available information at the issuance date of these financial statements. Subsequent changes in conditions or available information may change assumptions and estimates.

The carrying values of cash, cash equivalents, restricted cash and secured notes payable are reported in the Consolidated Balance Sheets and approximate their fair values due to their short-term natures and liquidity. The aggregate carrying values of the senior notes, net of discount, were $1.4 billion at September 30, 2014 and December 31, 2013. The aggregate fair values of the senior notes were $1.5 billion and $1.6 billion at September 30, 2014 and December 31, 2013, respectively. The fair values of the Company’s senior notes have been determined using quoted market prices (Level 2).

The following table displays the values and methods used for measuring the fair values of financial instruments on a recurring basis:

FAIR VALUE

(in thousands)

HIERARCHY

SEPTEMBER 30, 2014

DECEMBER 31, 2013

Marketable securities, available-for-sale

U.S. Treasury securities

Level 1

19,224

76,504

Obligations of U.S. government agencies

Level 1

21,014

17,068

Municipal debt securities

Level 2

14,225

32,976

Corporate debt securities

Level 2

132,080

157,879

Asset-backed securities

Level 2

17,527

20,489

Time deposits

Level 2

1,606

Short-term pooled investments

Level 1

10,016

6,633

Mortgage loans held-for-sale

Level 2

87,141

139,576

Mortgage interest rate lock commitments

Level 2

6,594

5,218

Forward-delivery contracts

Level 2

(550

)

2,261

Marketable Securities, Available-for-sale

At September 30, 2014 and December 31, 2013, the Company had $214.1 million and $313.2 million, respectively, of marketable securities that were available-for-sale and comprised of U.S. Treasury securities; obligations of U.S. government agencies; municipal debt securities; corporate debt securities; asset-backed securities of U.S. government agencies and covered bonds; time deposits; and short-term pooled investments. The Company’s marketable securities, available-for-sale that were identified as Level 2 were valued based on quoted market prices of similar instruments. (See Note 8, “Marketable Securities, Available-for-sale.”)

Other Financial Instruments

Mortgage loans held-for-sale and forward-delivery contracts are based on quoted market prices of similar instruments (Level 2). Interest rate lock commitments (“IRLCs”) are valued at their aggregate market price premium or deficit, plus a servicing premium, multiplied by the projected close ratio (Level 2). The market price premium or deficit is based on quoted market prices of similar instruments; the servicing premium is based on contractual investor guidelines for each product; and the projected close ratio is determined utilizing an external modeling system, widely used within the industry, to estimate customer behavior at an individual loan level.

At September 30, 2014 and December 31, 2013, contractual principal amounts of mortgage loans held-for-sale totaled $84.8 million and $137.5 million, respectively. The excess of the aggregate fair value over the aggregate unpaid principal balance for mortgage loans held-for-sale measured at fair value totaled $2.3 million and $2.1 million at September 30, 2014 and December 31, 2013, respectively. These amounts were included in “Financial services” revenues within the Consolidated Statements of Earnings. At September 30, 2014, the Company held two repurchased loans with payments 90 days or more past due that had an aggregate carrying value of $466,000 and an aggregate unpaid principal balance of $737,000. At December 31, 2013, the Company held two repurchased loans with payments 90 days or more past due that had an aggregate carrying value of $467,000 and an aggregate unpaid principal balance of $738,000.

In accordance with ASC No. 825 (“ASC 825”), “Financial Instruments,” the Company elected the fair value option for its IRLCs and its forward delivery contracts. The fair values of IRLCs were included in “Other” assets within the Consolidated Balance Sheets, and the fair values of forward-delivery contracts were included in “Other” assets and “Accrued and other liabilities” within the Consolidated Balance Sheets. For the three-month period ended September 30, 2014, losses realized on the IRLC pipeline, including activity and changes in fair value, totaled $1.8 million, compared to a gain of $7.9 million for the same period in the prior year. Gains realized on the IRLC pipeline totaled $1.4 million and $5.0 million for the nine-month periods ended September 30, 2014 and 2013, respectively. Losses on forward-delivery contracts used to hedge IRLCs totaled $951,000 and $3.3 million for the three-month periods ended September 30, 2014 and 2013, respectively. Losses on forward-delivery contracts used to hedge IRLCs totaled $8.2 million for the nine-month period ended September 30, 2014, compared to gains on forward-delivery contracts that totaled $7.0 million for the nine-month period ended September 30, 2013. Gains on loan sales totaled $7.7 million and $2.3 million for the three-month periods ended September 30, 2014 and 2013, respectively, and $20.5 million and $10.6 million for the nine-month periods ended September 30, 2014 and 2013, respectively. Net gains and losses related to IRLCs, forward-delivery contracts and loan sales were included in “Financial services” revenues within the Consolidated Statements of Earnings.

While recorded fair values represent management’s best estimate based on data currently available, future changes in interest rates or in market prices for mortgage loans, IRLCs and forward-delivery contracts, among other factors, could materially impact these fair values.

(See Note 9, “Housing Inventories” for the Company’s fair value measurement of its nonfinancial instruments.)

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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